In its 2005 report on Monetary Policy Transparency in Colombia, Oxford Analytica stated that Colombia's overall score of "Compliance in Progress" remained unchanged from the previous year, although that there had been increased political pressure by the government on the Bank of the Republic (BanRep) over the past year, and some commentators have suggested that the BanRep's high levels of operational autonomy have been compromised to an extent. The central bank has a very solid technocracy, and internal controls should protect against political pressures to a significant degree. However, the constitutional amendment - allowing the President to run for a second term - is an institutional change, so it is important to put in place institutional checks to guard against any possible threats to the independence of the BanRep. The 1991 Constitution of Colombia provides for an independent Bank of the Republic with the authority to implement monetary policy, and to regulate foreign exchange and financial markets. The Central Bank Law of 1992 further develops the legal framework contained in the constitution, while the BanRep's own statutes determine internal procedures. The BanRep has continued to follow an inflation-targeting framework, and inflation currently lies in the middle of the target corridor. The BanRep observes the International Monetary Fund (IMF) Special Data Dissemination Standard (SDDS) for monetary data within its responsibilities, and produces a comprehensive range of information on monetary policy and overall macroeconomic conditions.

General Overview

In its 2005 Report on Transparency in Monetary Policy, Oxford Analytica (OA) noted that there had been increased political pressure by the government on the Bank of the Republic (BanRep) over the past year, and some have suggested that the BanRep's high levels of operational autonomy have been compromised to an extent. (This is of particular concern given that Alvaro Uribe was re-elected as the President of Colombia in 2006). The president is allowed to appoint two of the seven members of the board in 2008 (this is in addition to the three he has already appointed and any members who resign or retire). The central bank has a very solid technocracy, and internal controls should protect against political pressures to a significant degree. However, the constitutional amendment - allowing the President to run for a second term - is an institutional change, so it is important to put in place institutional checks to guard against any possible threats to the independence of the BanRep through appointments in the future when there may be different people, possibly with less professional integrity, and a different culture in the central bank. No such checks have been formally proposed so far. (OA 2005, p. 70)

OA went on to note that Colombia has a well-established institutional framework that governs the setting of monetary policy. The 1991 Constitution of Colombia provides for an independent Bank of the Republic with the authority to implement monetary policy, and to regulate foreign exchange and financial markets. The Central Bank Law of 1992 further develops the legal framework contained in the constitution, while the BanRep's own statutes determine internal procedures. The BanRep has continued to follow an inflation-targeting framework (the inflation target being BanRep's primary objective), and inflation currently lies in the middle of the target corridor. Commentators did express concern that, with the peso not floating freely and with questions over political pressures on BanRep, the effectiveness of the inflation-targeting framework may be compromised to some extent in the future. The BanRep observes the International Monetary Fund (IMF) Special Data Dissemination Standard (SDDS) for monetary data within its responsibilities, and produces a comprehensive range of information on monetary policy and overall macroeconomic conditions. BanRep's website is regularly updated with information, reports, legislation, and board decisions, as well as economic and financial data, and regular press releases with information on monetary policy decisions. Changes in the setting of monetary policy instruments (other than fine-tuning measures) are publicly announced and explained in a timely manner. BanRep has strengthened its communication with the financial community over the past year. (IMF SDDS website; OA 2005, pp. 70-71)

In its 2006 Article IV Consultation with Colombia, the IMF reported that the inflation targeting framework has been successful in reducing inflation and anchoring expectations. The staff noted that inflation targeting appeared to have reduced the persistence of inflation and increased the importance of forward looking expectations in determining current inflation. Near-term inflation expectations, however, have risen in recent months to above the inflation target for 2006. Long-term inflation expectations are about 41/2 percent, slightly above the medium-term target range of 2-4 percent. The authorities reiterated that they would adjust monetary policy as necessary to meet the inflation targets in 2006 and beyond and expected long-term inflation expectations to decline over time, as the central bank reduced inflation to within this range. (IMF 2006, p. 19)

The IMF also noted that the BanRep communicates its views on monetary policy transparently, but the IMF staff suggested that limiting foreign exchange intervention would send a clearer signal. The Executive Board of the BanRep explains its policies in several ways, including through quarterly inflation reports, semiannual reports to congress and numerous seminar presentations. However, the staff suggested that the central bank's foreign exchange intervention, which has been sizable since end-2003, could at times send a confusing signal about the intentions of monetary policy. It added that a narrow threshold for an automatic intervention rule could invite speculation, if the central bank were perceived to be obliged to intervene. For this reason, it recommended that the threshold for the excess volatility rule be widened to +/-4 percent, its level prior to October 2005. The authorities responded that the foreign exchange purchases between December 2003 and early 2006 moderated the appreciation of the peso vis-à-vis the U.S. dollar without undermining the central bank's ability to meet its inflation target. It noted that the excess volatility rule is transparent and has helped dampen undue exchange rate volatility without providing investors an incentive for one-way bets. (IMF 2006, pp. 19-20)

According to the 2005 OA assessment there have been pressures on exchange rate arrangements. In December 2004, President Uribe threatened to declare a state of emergency if the central bank did not fix an exchange rate floor. Certain members of the Cabinet decided not to support the initiative by the president and thus it was not declared, rather the notion of defending Uribe's stated desired exchange rate floor was put in place. This has led to increasing opaqueness, as the peso is not being allowed to float entirely freely and commentators maintain that there is a degree of 'financial engineering' to maintain the floor. The result has not been too worrisome thus far, but this is an area to watch. The BanRep maintained that the recent sale of reserves to the government was their initiative, supported by the IMF, in exchange for bonds in order to assure the intervention was sterilized. ()A 2005, p. 70)

Still, the IMF staff and the Colombian authorities agreed that the flexible exchange rate regime introduced in 1999 continues to serve Colombia well. It has supported real economic growth by allowing relative prices to adjust to changing external conditions, such as terms of trade shocks and shifts in sentiment in international capital markets, and reducing the volatility of interest rates. (IMF 2006, p. 20)

The Principles

Clarity of roles, responsibilities and objectives of central banks.

CP

Oxford Analytica (OA), in its 2005 Report on Monetary Policy Transparency in Colombia, rates Colombia's compliance with this principle as "Compliance in Progress". According to the OA report, Colombia has a well-established institutional framework that governs the setting of monetary policy. The 1991 Constitution of Colombia provides for an independent Bank of the Republic (Banco de la Republica - BanRep) with the authority to implement monetary policy, and to regulate foreign exchange and financial markets. The Central Bank Law (LBR) of 1992 further develops the legal framework contained in the constitution, while the BanRep's own statutes determine internal procedures. (OA 2005, p. 71)

The OA report noted that the 1991 Constitution of Colombia sets policy objectives for the central bank. Its primary responsibility is to safeguard the purchasing power of the national currency. In this context, the control of inflation is the chief objective of monetary policy. The LBR also requires the use of inflation targets to achieve price stability, with each year's targets typically set below the previous year. The constitution and Article 1 of the LBR provide for an independent central bank with financial, operational and technical autonomy from other branches of the state. The BanRep is subject only to its own legal regime, which is set out in the constitution, the LBR and additional BanRep statutes. (OA 2005, p. 71)

Because the president is allowed to appoint two of the seven members of the Board of Directors per term, there is a concern in that Alvaro Uribe, who was re-elected to the presidency in 2006, would appoint two more members of the BanRep board three years from now (this is in addition to any members who resign or retire). Having already appointed three board members, Uribe's appointees to the board would amount to five out of the seven. As the board elects their governor, a majority on the board carries influence here too. The appointment of the two further board members will, however, be at the end of the president's second term, so for the bulk of his second term he will not have a majority of appointees on the board. The president would need a third term to really control the board in terms of appointments. (OA 2005, p. 71)

There have also been political pressures on the central bank to use the international reserves toallow the government to pre-pay external debt, and there has also been pressure to defend anexchange rate floor, which some worry compromises inflation targeting. BanRep maintains that it has not yielded to political pressures from the government, but in the face of increasingconcerns voiced by some, it will be important for BanRep to visibly maintain its reputation forhigh levels of independence and professionalism. (OA 2005, p. 69)

The OA report further notes that there have also been pressures on exchange rate arrangements. In December 2004, President Uribe threatened to declare a state of emergency if the central bank did not fix an exchange rate floor, and he indicated the exchange rate floor he wanted (2,300 pesos to the U.S. dollar). Certain members of the Cabinet decided not to support the initiative by the president (their signatures would be needed to sign a state of emergency) and thus it was not declared. Rather, the notion of defending the 2,300 exchange rate floor was put in place. This effectively 'opened a door that is difficult to close'. This has led to increasing opaqueness, as the peso is not being allowed to float freely. BanRep, however, judges that it would be an error in the short to medium term to allow an entirely free-floating exchange rate. Commentators maintained that BanRep has yielded to political pressure in three main ways: the international reserves; the exchange rate floor; and current 'financial engineering' to maintain the floor (and the prevention of a free-floating forex). The result has not given too much cause for concern thus far, but it has the potential to result in future problem, which should be watched for. The BanRep maintained that the recent sale of reserves to the government was their initiative, supported by the International Monetary Fund, in exchanges for bonds in order to assure the intervention was sterilized and prevent growth of the money supply. BanRep maintained that their problem became convincing the government to sell bonds to the BanRep in exchange for reserves. Now that Uribe has been re-elected, these political pressures on the central bank will likely mount. BanRep has a strong reputation as an independent, professional central bank, so it will need to work to ensure this reputation is not damaged by yielding to any further political pressure. At least, however, the president's opinions, statements, and any pressure he exerts on the BanRep are all presented publicly and in a relatively open manner. (OA 2005, pp. 71-72)

The constitution and the LBR both call for the coordination of macroeconomic policy between the central bank and the executive branch of government. This coordination is planned every year during the process of designing the overall macroeconomic program, and the policy framework is then set out in the government's Annual Macroeconomic Plan, issued by the Council of Economic and Social Policy (CONPES). However, in the event of conflict between fiscal and monetary authorities and their respective objectives, the LBR stipulates that the objective of price stability should take priority. The minister of finance chairs the BanRep Board of Directors, thereby reinforcing the principle of monetary and fiscal coordination. The minister of finance does not have veto or preferential voting powers. (OA 2005, p. 72)

The OA acknowledges that concerns remain as to whether some of the assumptions used in the financial programming exercise, such as the establishment of a target exchange rate level, constrain the BanRep Board of Directors in their monetary and foreign exchange interventions. This potential conflict of interests was evident in mid-May 2003, when President Alvaro Uribe repeatedly expressed his concern about the strengthening of the peso against the dollar, urging the central bank to secure exchange rate competitiveness in order to sustain exports and overall employment. In turn, BanRep officials stated that the central bank would implement dollar auctions to keep the exchange rate at 'adequate levels' while stressing the negative impact of a strong peso on debt servicing. (OA 2005, p. 72)

Article 373 of the constitution establishes that the BanRep may only lend to the government with unanimous consent of the Board of Directors. Articles 12 and 13 of LBR establish that the central bank may carry out lender of last resort operations to state-owned financial institutions and that it may guarantee financial operations by the government, respectively. However, the LBR does not establish explicit quantitative ceilings or restrictions on lending to the government which, for example, could be related to a percentage of the federal government's expenses as arranged in the annual budget. (OA 2005, p. 73)

Open process for formulating and reporting monetary policy decisions.

CP

Oxford Analytica (OA), in its 2005 Report on Monetary Policy Transparency in Colombia, rates Colombia's compliance with this principle as "Compliance in Progress". The OA Report notes that although the Central Bank (BanRep) has adopted inflation targets since the 1992 reform, the current framework - in which the inflation target is the main policy objective - started in 1999, when a floating exchange rate was adopted. Historically, the central bank had missed its inflation targets, largely because it was working towards several policy objectives, of which the inflation target was only one. However, the monetary policy framework has undergone a gradual transition to a standard inflation-targeting framework, in which the currency floats and monetary interventions are closely focused on a reference overnight interest rate. (OA 2005, p. 75)

The BanRep has continued to follow an inflation-targeting framework during 2005. Inflation-targeting framework works well if two assumptions are in place: a floating exchange rate and the independence of the central bank. As there have been some questions over these two aspects of late, commentators were concerned about the future effectiveness of the inflation-targeting framework. BanRep is openly not floating the peso entirely freely, though the stated main priority of the BanRep is inflation targeting. (OA 2005, p .75)

Inflation targeting is focused on changes in the consumer price index. The BanRep also monitors core inflation, which excludes products that can be subject to considerable variation owing to environmental changes and cyclical demand. Since 2000, the monetary authorities have adopted a two-year target to better accommodate lags between policy implementation and the effect on inflation, replacing the earlier practice of an inflation point target that had been in use since 1992. Intervention rules for monetary policy are clear and participation of the central bank in the market is disclosed on a daily basis. (OA 2005, p. 75)

OA asserts that the most important monetary instrument is the interest rate on the central bank's repo and reverse-repo operations, which is used to control liquidity and signal the monetary stance. The Board of Directors determines the minimum and maximum interest rates for the repo and reverse-repo auctions. In turn, the scale of open market operations is determined every month according to estimates of the demand for liquidity measured by the base money reference line and the supply of base money through expected open market operations, central bank interventions in the foreign exchange market, lender of last resort operations, and the BanRep balance sheet. There has been a gradual narrowing of the range of the policy rates as the monetary policy strategy has become clearer and has contributed to strengthening the link between the policy rates, the overnight rate and longer term rates. A detailed description of the central bank's monetary framework, instruments, forecast models and reaction strategy is available for public consultation, although only as working papers of the BanRep staff. Monetary transparency would be increased if this information were posted on the website with a separate hyperlink. (OA 2005, p. 76)

Changes in the setting of monetary policy instruments (other than fine-tuning measures) are publicly announced and explained in a timely manner. The BanRep publishes a quarterly inflation report and a bi-annual financial stabilization report. It also reports twice a year to Congress on the balance of payments, monetary policy and coordination with fiscal policy. It reports monthly to the public to explain any changes in the monetary stance, and it always publishes a press release after every board meeting. With regard to inflation targeting the BanRep helps forecast and tame monetary expectations. (OA 2005, p. 76)

The Board of Directors includes the governor of the BanRep (who is not appointed by the president, but rather by the board, and is thus more accountable and independent), the minister of finance (who chairs the board), and five co-directors appointed by the president for a period of four years. The constitution and Law 31 of 1992 clearly specify the procedures for electing and removing the members of the Board of Directors. During a presidential term, the president is entitled to change two co-directors, and is required to replace any member who retires, resigns or dies. The previous two administrations both appointed three board members towards the end of their term, who together with the minister of finance now constitute a majority on the board. (OA 2005, p. 77)

The OA 2005 report stresses that President Uribe, who had appointed three members of the BanRep board thus far, will appoint two more in 2008, since he has successfully won re-election for a second term. This is in addition to any members of the board who may resign or retire during this period. As the board elects their chairman, a majority on the board carries influence here too. The appointment of the two further board members will, however, be at the end of the president's second term, so for the bulk of his second term he will not have a majority of appointees on the board. The president would need a third term to really control the board in terms of appointments. The central bank also has a very solid technocracy, and internal controls should protect against political pressures to a significant degree. For example, the monthly inflation report has only three introductory pages written by the board, but the rest of the report is written by the technical team and is not vetted by the board. (OA 2005, p. 77)

Minutes of board meetings are not published until five years after the event, but a summary, including the considerations behind key decisions is published. However, when board decisions are not taken by overall consensus, those members who disagree with the adopted position can go public at any point and explain why they departed from a decision. The disagreements are then published in the BanRep journal. This has happened on several occasions. For example when Colombia floated the exchange rate in 1999, two members of the board went public, and most recently a board member went public with their opposition to voice concern over President Uribe's pressure on the central bank to use international reserves. (OA 2005, p. 77)

The BanRep's website contains regular press releases with information on monetary policy decisions. The central bank has published a monthly summary of board meetings since the early 1990s. In addition to decisions by the board, the central bank releases information on its open market interventions through daily press releases. (OA 2005, p. 77)

There is no formal public consultation mechanism on monetary policy and financial regulation, nor is there an established mechanism for incorporating external reviews or suggestions into the policymaking process. However, the BanRep public relations department does offer courses to interested journalists, in an effort to promote understanding of the methodology and strategy used by the central bank in seeking to achieve the inflation target. (OA 2005, p. 78)

Public availability of information on monetary policy.

CP

Oxford Analytica (OA), in its 2005 Report on Monetary Policy Transparency in Colombia, rates Colombia's compliance with this principle as "Compliance in Progress". The OA report notes that the Central Bank (BanRep) sells the Revista Mensual del Banco de la Republica, which contains statistical information and all recent economic legislation. In addition, the BanRep issues a quarterly report on economic indicators -- Indicadores Economicos Colombia -- that contains data on the GDP, balance of payments, trade and foreign direct investment and foreign debt. This publication also provides details of monetary aggregates, price indices, exchange rates and public finances (in Spanish and English). The central bank website provides quarterly GDP, employment and inflation data, balance of payments, public finances and financial data, including monetary aggregates, interest rates and stock exchange data. The financial section also includes the analytical accounts of the central bank. Methodological notes on the compilation of data are available from the International Monetary Fund (IMF) Special Data Dissemination Standards (SDDS) website. Commentators emphasized that information regarding procedures and intervention in the markets is very clear, and that the quality of aggregates is very high. They noted the professionalism of the BanRep. (IMF SDDS website; OA 2005, p. 79)

In addition, according to OA, the BanRep releases monetary data in a timely and regular fashion, in accordance with its commitment to the IMF SDDS. Within the data that the central bank reports, Colombia is taking the extensive branch banking system flexibility for the timeliness of the data on the analytical accounts of the banking sector. Data publication is according to the advance release calendar available on the BanRep and IMF websites. Specific regulations and BanRep board decisions on lending operations are made available on the website in the sub-section on economic information. Consolidated information on lending and liquidity operations is produced on the central bank balance sheet, as disbursements in the revenue and payment statements. Detailed information on all BanRep operations is also available through press releases published on the website. (OA 2005, p. 79)

Finally, OA notes that the BanRep's website is regularly updated with information, reports, legislation and board decisions, as well as economic and financial data. Additional information can be furnished on request from the research department. The BanRep upgraded its English language website to include translations of the Inflation Reports and the board's report to Congress, but additional information on the monetary policy framework would enhance transparency. A webpage with contact details is available, in order to provide users with additional information upon request. (OA 2005, pp. 79-80)

Accountability and assurances of integrity by the central bank.

CP

Oxford Analytica (OA), in its 2005 Report on Monetary Policy Transparency in Colombia, rates Colombia's compliance with this principle as "Compliance in Progress". According to the OA report, the Central Bank (BanRep) is accountable to Congress as stated in the constitution and the Central Bank Law (LBR), and is subject to external control by the executive and the Attorney General, as established in Articles 46 and 48 of the LBR. The accumulated financial statements of the central bank are available on its website in March and September. These reports are prepared by central bank staff, and include the profits and losses disaggregated by type of intervention. International reserves and securities held by the central bank are valued at market prices. Financial statements are subject to the audit and supervision of the Attorney General, who reports to the executive, the BanRep Board of Directors, Congress and the public. The Notes of the Financial Statement provide details of the auditing process and the accounting practices followed by the central bank. (OA 2005, p. 81)

The OA goes on to note that the President of the Republic appoints a Central Bank Auditor to audit the financial statement, with the Superintendent of Banks and Financial Institutions responsible for external control and supervision of the central bank. Since the fiscal year 2002, an independent external auditor has also been appointed The Comptroller's office also oversees some aspects of the BanRep's operations. Standards for the personal conduct of BanRep officials and staff are outlined in Articles 38-44 of the LBR. These requirements establish that central bank staff must comply with the LBR, bylaws and all internal BanRep regulations while exercising their duties. In addition, there is a disciplinary code (Codigo Unico Disciplinario) that applies to all public officials, including members of the central bank. However, the LBR does not explicitly establish the provisions under which BanRep Board members can be removed, except for the general guidelines established in Article 35. (OA 2005, p. 81)